Decisions, Decisions: Choosing Choice and Offering Employee Choice Plans

Lori Clancy, Oracle Billy Vitense, Starbucks Denise Glagau, Baker & McKenzie Larry Reynolds, Fidelity Stock Plan Services

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Welcome and Introductions – Company backgrounds

Prevalence of Choice Programs

Oracle and Starbucks Choice Programs – Objectives and program design – Process summary and communication strategy – Election history

Tax and Legal Considerations

Other Choice Program Examples

Key Takeaways

Agenda

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COMPANY BACKGROUNDS

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Oracle

Company Background 2nd largest software company in the world

Develops and markets computer hardware systems and enterprise software products

Founded in 1977; IPO in 1986

Headquarters in Redwood City, CA

Over 95 acquisitions in the last 10 years

Larry Ellison owns 25% of outstanding stock

Award Philosophy 95% of equity awards granted at annual focal in July

Prior to July 2014, granted only NQ stock options

Annual equity grant now allows for choice between options and RSUs

VP and above may elect to defer RSU awards

Key Statistics

Annual Revenue $38.3B

Total Employees 133K

Employees Receiving Equity 25K

Stock Delivered Globally In 49 countries

% U.S. Based 60%

% Global (Non-U.S.) 40%

Award Types:

Stock Options Yes

Restricted Stock/Units Yes

Performance Yes

Employee Stock Purchase Plan Yes

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Starbucks

Company Background Founded in 1971; Howard in 1987; IPO in 1992

Headquarters in Seattle, WA

Over 25,000 retail locations in over 75 countries

Starbucks Siren – Roastery and Special Reserves

Princi, Evolution Fresh, Teavana, Tazo, Seattle’s Best

Award Philosophy Pay for performance

Shared success

Shareholder engagement

Social impact and responsibility – Opportunity youth, college achievement, military

and refugee hiring

Key Statistics

Annual Revenue $21.3B

Total Partners (green apron) > 300K

Partners Receiving Equity 162K

Stock Delivered Globally In 22 markets

% U.S. Based 70%

% Global (Non-U.S.) 30%

Award Types:

Stock Options Yes

Restricted Stock/Units Yes

Performance Yes

ESPP (S.I.P.) Yes

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PREVALENCE OF CHOICE PROGRAMS

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Choice is limited

Only 6% of companies surveyed allowed recipients to choose award type – Up from 3% in 2013

Majority offered restricted stock/units and stock options

Few offered performance awards or cash awards

Industry Usage of Choice Plans

100%

79%

14% 14%

Restricted stock/units Stock options/SARs

Performance awards Cash

Source: NASPP/Deloitte 2013 Stock Plan Design Survey. Source: NASPP/Deloitte 2016 Stock Plan Design Survey.

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ORACLE AND STARBUCKS CHOICE PROGRAMS

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Overview and Purpose

Rolled out for July 2014 annual grant

Approximately 25,000 employees eligible worldwide – Certain locations not allowed choice, e.g. Australia, Russia

Choices: – 100% stock options – 100% RSUs converted at 1:4 from options – 50% options, 50% RSUs – Default is 50/50 for VP+; 100% RSUs for below VP – All selections vest 25% over 4 years – U.S. employees $216K+ eligible for deferral – Top 5 execs excluded from choice due to grants with performance conditions

Oracle Choice Program

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Overview and Purpose

Looking to roll out in September 2017 for November award

Approximately 1,100 employees eligible worldwide

Choices: – 100% stock options – 100% RSUs – 50% options, 50% RSUs – Default will be 50/50 – Stock options and RSUs would vest 25% per year over 4 years

SLT would not be eligible for choice and maintain 60/40 mix

Delayed a year as concerned about choice remorse – Creation of Leadership Rewards site – educate, educate, educate

Starbucks Choice Program

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Process Summary

Employee notified via email of proposed equity award; instructions provided for login to secure internal site nicknamed “Choice App”

After logging in to Choice App: – Employee required to watch video which defines options and RSU awards, and

differences between the two – Required to review short country-specific tax supplement – Encouraged to read attached FAQ – Indicate choice and receive verification email

Employee able to make changes during 3-week open election period

After period close, file approved by Comp Committee on grant date, and forwarded to stock services for processing

Oracle Choice Program

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Communication Strategy

Email (with excerpt of FAQ) sent to manager 2 weeks prior to opening of Choice App – Manager encouraged to communicate recommended equity amount and explain that employee is now offered

a choice between equity types – Reinforces that award is still “recommendation” and requires Board approval – Manager cautioned NOT to provide advice or recommendation regarding taxes or choice

Email confirmation sent to employee after each choice (can revisit and change up until deadline)

Employee receives congratulatory email notifying of equity award and containing link to Choice App

After approval by Comp Committee of BOD, email sent to employee: – Congratulations! Based on the preference of equity award you communicated earlier to Oracle, Oracle

Corporation hereby grants you [XXX units of restricted stock, and a stock option to purchase XX shares of common stock, with an exercise price of US $XX per share and grant date of XXX].

– Includes links to Plan and Prospectus and 10-K, and explains timing and process for receiving and accepting grant(s); includes notification that acceptance of grant conveys data privacy transfer consent

Oracle Choice Program

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Starbucks Leadership Reward Site

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Starbucks Leadership Reward Site

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Starbucks Leadership Reward Site

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Election history – In 2014 and 2015, Oracle allowed Choice for all grants – In 2016, Oracle eliminated Choice on new hire and retention grants, issuing

only RSUs – Choice is now only offered with the annual grant in July

Oracle Choice Program

2014 2015 2016 # grants % # grants % # grants %

100% Options 3,217 17% 3,168 15% 1,203 5% 100% RSUs 13,250 68% 15,683 73% 18,983 80% 50/50 3,000 15% 2,558 12% 3,584 15% Total 19,467 100% 21,409 100% 23,370 100%

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RSU Deferrals

U.S. employees $216K+ eligible for deferral

Deferral timing choices: – Separation from Oracle, or – 5 years from grant date or separation from Oracle, whichever comes first, or – 10 years from grant date or separation from Oracle, whichever comes first

Deferral payment choices: – Lump sum payment, or – Quarterly payments for 5 years, or – Quarterly payments for 10 years

Out of approximately 1,800 eligible, less than 3.5%, or 68 employees, elected deferral

Oracle Choice Program

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RSU Deferral Example

Employee eligible for 16,000 option shares

Elects to receive RSUs; awarded 4,000 RSUs (16,000/4)

Defers 5 years from grant date with 10-year quarterly distribution

Employee pays Social Security and Medicare tax at vest

Terminates 1 year after grant – 1,000 RSUs vested and deferred (4,000/4) – Receives quarterly distribution of 15 shares

1,000/40 quarters = 25 shares 40% tax withholding = 10 shares netted for taxes (only federal and state taxes applied at distribution)

– Each quarterly distribution has a different tax basis – Dividends accrued for undistributed shares

Oracle Choice Program

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TAX AND LEGAL CONSIDERATIONS

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Tax Issues

Need to review tax treatment for all award types that will be offered to employees – May be more costly and time-consuming

Certain award types may be subject to more favorable tax treatment than others, for example: – Options in Canada may benefit from 50% tax exemption while other awards

do not – In the U.K., tax-advantaged programs exist for options (but generally not

other award types)

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Tax Issues, continued

Different award types may have very different tax treatment – Belgium–options are taxed at grant or exercise depending on when they are

accepted, while RSUs are taxed at vesting

Tax withholding/reporting obligations may be different depending on award type

Social insurance obligations may be different depending on award type – Impacts both employer and employee

Differences in tax treatment, withholding/reporting, and social insurance obligations may be more pronounced if choice is between equity and cash award

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Tax Issues, continued

Company will need to determine whether to offer choice program or offer different choices/alternative awards or just grant one award type

Company should (must) provide tax information regarding each award type so that employee can make informed decision – Even more crucial where there are differences in treatment and applicable

obligations

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Need to review securities law issues for all award types that will be offered to employees – Again, may be more costly and time-consuming

In some countries, one award type may not be desirable for securities law reasons, for example: – RSUs in Australia cannot benefit from same self-executing exemption from

prospectus/disclosure requirements that apply to stock options – Options in Indonesia may need to be restricted to cashless exercise to avoid

securities filing – Options in Japan may trigger onerous securities filing (if 50+ offers)

Securities Law Issues

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“Offer” may be considered to be made at the time the choice between awards is offered (and possibly again at grant or at a later point) – Securities filing or other requirement may be triggered at that time, as well as

at the later points (e.g., Australia, Malaysia)

In some countries, certain award types are not usually subject to securities law compliance because the employee does not provide any consideration for the award or the shares (e.g., most RSUs) – Choice element may alter this view of the award as the employee may be

seen to be “paying” for one type of award by relinquishing the other (e.g., EU, Japan)

Securities Law Issues, continued

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Company will need to determine whether to offer choice program (and deal with any filings/requirements) or offer different choices/alternative awards or just grant one award type

Company should consider providing disclosures regarding each award type so that employee is aware of consequences of choice – E.g., if the company is going to impose a cashless exercise restriction on

options to avoid securities filing, employee may prefer to receive RSUs in order to hold shares

Securities Law Issues, continued

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Exchange Control Issues

Need to review exchange control issues for all award types that will be offered to employees – Again, may be more costly and time-consuming

Employees may be subject to more significant exchange control requirements for certain awards (e.g., options) versus other awards (e.g., RSUs)

Company may need to impose special terms on one award type and not the other to comply with exchange control rules

Company should consider providing disclosures regarding each award type so that employee is aware of consequences of choice – E.g., if the employee would be required to take onerous steps to exercise

options or may be subject to limits on such investments, employee may prefer to receive RSUs

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Labor Law Issues

Providing employees with choice program materials may create entitlement to award (or create impression that employee is entitled to award once choice made) – Clear communications and robust disclaimers are needed to mitigate risk

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“Remorseful employee” problem – employee could ask for damages/to be made whole for having made “wrong” choice

Some mitigation strategies: – Clear and comprehensive communications

Examples and/or calculators Tax information for each award type offered Translations of choice program materials

– Appropriate disclaimers and indemnity clause in choice program materials – Hard-copy documentation of choice

General Issues

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EXAMPLES OF CHOICE PLANS

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Examples of Choice Plans

Coach Adopted in 2007

Fairly broad based in nature: “corporate” employees and a portion of “field” employees

Plan was historically options based; looking to diversify after market conditions changed

Choice of 100% RSUs, a mix of options and RSUs, or 100% options

Annual election with a default; previous elections do not carry over

From 2007-2015, between 77%-88% of participants made an election

Conducted an employee survey prior to launching Choice program to determine employee interest

3M Adopted in 2015

Eligible participants are managers, directors, and above globally

Viewed the Choice program as a way to stay competitive from a compensation perspective

Choice of 100% RSUs, a mix of options and RSUs, or 100% options

Annual election with a default – previous elections do not carry over

In 2015, 82% of participants made an election

Coach, 3M, and Fidelity Investments are not affiliated.

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CONCLUSION

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Choice program promotes a better understanding and appreciation of equity grants and overall program

Despite the complexities of choice elections, concise and simple communications are critically important – Need to make sure enough content is provided to allow grantees to make an informed

decision

Choice can be more challenging for employees due to communications/tax/ securities and other regulatory complexities

– Consider targeted communications for certain non-U.S. recipients based on these complexities

If RSU deferral is offered, be prepared for challenges

Key Takeaways

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Thank You

Lori Clancy Oracle Corporation

lori,clancy@oracle.com

Denise Glagau Baker & McKenzie LLP

Denise.Glagau@bakermckenzie.com

Billy Vitense Starbucks Corporation

Bvitense@starbucks.com

Larry Reynolds Fidelity Investments

lawrence.reynolds@fmr.com

FOR CEP and NASPP SYMPOSIUM ATTENDEES ONLY. CEP, NASPP, Oracle, Starbucks, Baker & McKenzie, and Fidelity Investments are not affiliated. Fidelity Stock Plan Services, LLC. 793076.1.0